Nikkei drops before German ESM ruling, Fed meeting

Japan's Nikkei average sagged on Tuesday as investors cut their exposure to exporters and riskier stocks, awaiting a ruling from German's constitutional court on the legality of the European bailout fund and the US Federal Reserve policy meeting this week.

The Nikkei dropped 0.7% to 8,807.38, but held above its 75-day moving average support level at 8,780.30.

Germany's constitutional court holds the fate of the euro in its hands when it rules whether the European Stability Mechanism (ESM) can go ahead, after already holding it up for several months.

"A lot of people assumed that the ESM would pass without any problems but I think there is still quite a bit of opposition in Germany to it, which could be dangerous," said Masayuki Otani, chief market analyst at Securities Japan.

Cyclical stocks, which have a relatively high correlation to the health of the economy, came under pressure. Industrial robot maker Fanuc Corp was down 1.6%, Mazda Motor Co was off 2.1% and Toyota Motor Corp lost 1.7%.

Investors have had high hopes that the US Fed will announce another round of stimulus, or quantitative easing, after it concludes a two-day meeting on Thursday - but some are concerned that such a move could strengthen the yen, pinching exporters' overseas revenues.

"The style drift in the market today is such that cyclicals and financials are being shunned and de-weighted and autonomous growth stocks which are non-dependent on the yen," said a senior trader for a foreign bank who said 70% of his orders on Tuesday were short sales.

Social gaming company Gree Inc, which derives most of its revenue from the domestic market, gained 2.8% to four-week high and was the second-most traded stock by turnover on the main board for much of the day, behind its rival DeNA Co Ltd, which was up 1.1%.

Investors have been reassured that both Gree and DeNA's earnings have recovered, the trader said, after their stock prices lost almost 50% in May on fears that revenue would be crimped by the loss of their "complete gacha" games due to gambling regulations.

Societe Generale said another round of monetary policy easing from developed to emerging economies could be good for the Japanese equity market as it would push bond yields at the long end of the yield curve to even lower levels, leading investors to seek assets with higher returns.

In a note, it said that among its investment recommendations, British and Japanese equities offer a return of nearly 2% above domestic government bond yields.

The Nikkei is up 4.2% so far this year, while yields on benchmark 10-year Japanese government bonds were quoted at 0.795% on Tuesday, down 18.5 basis points since the beginning of 2012.

The broader Topix index lost 0.7% to 732.26 in very light trade, with volume at just 80% of its full daily average for the past 90 days.

_PAGEBREAK_

Tech stocks bearish

Technology stocks extended their losses after Intel Corp cut its third-quarter revenue estimate more than expected on Friday due to declining demand for its chips.

Shinko Electric Industries, Ibiden Co Ltd, Tokyo Electron Ltd and Advantest Corp were down between 1 and 3.1%.

Elsewhere, Panasonic Corp dropped 1.7% after Moody's Investors Service cut the consumer electronic company's rating by two notches to Baa1.

Japan Tobacco Inc rebounded 2% after slumping 8.4% in the previous two sessions on concerns about more regulation in Europe after the French government said it was looking at raising tobacco prices in a bid to reduce smoking rates.